The Allen Company and the Barker Company are competitors in the same industry.
Selected financial data from their 2001 statements are shown below.
| Balance Sheet December 31, 2001 | ||
| Allen | Barker | |
| Company | Company | |
| Cash | $ 10,000 | $ 35,000 |
| Accounts receivable | 45,000 | 120,000 |
| Inventory | 70,000 | 190,000 |
| Investments | 40,000 | 100,000 |
| Intangibles | 11,000 | 20,000 |
| Property, plant, and equipment | 180,000 | 520,000 |
| Total assets | $356,000 | $985,000 |
| Accounts payable | $ 60,000 | $165,000 |
| Bonds payable | 100,000 | 410,000 |
| Preferred stock, $1 par | 50,000 | 30,000 |
| Common Stock, $10 par | 100,000 | 280,000 |
| Retained earnings | 46,000 | 100,000 |
| Total liabilities and capital | $356,000 | $985,000 |
| Income Statement For the Year Ended December 31, 2001 | |||
| Allen Company | Barker Company | ||
| Sales | $1,050,000 | $2,800,000 | |
| Cost of goods sold | 725,000 | 2,050,000 | |
| Selling and administrative expenses | 230,000 | 580,000 | |
| Interest expense | 10,000 | 32,000 | |
| Income taxes | 42,000 | 65,000 | |
| Net income | $ 43,000 | $ 73,000 | |
| Industry Averages: | |||
| Times interest earned | 7.2 times | ||
| Debt ratio | 40.3% | ||
| Debt/equity | 66.6% | ||
| Debt to tangible net worth | 72.7% | ||
Required a. Compute the following ratios for each company:
1. Times interest earned 3. Debt/equity ratio
2. Debt ratio 4. Debt to tangible net worth
b. Is Barker Company in a position to take on additional long-term debt? Explain.
c. Which company has the better long-term debt position? Explain.
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